The Price of Petrol and the role of Expectations

Prof E. Bijoykumar Singh *

Customers queuing up at a petrol pump at night-time on 12 July 2012 :: Pix - Bunti Phurailatpam

The price of a commodity rises due to various factors. Essentially it is the mismatch between demand for the commodity and the supply. When demand exceeds supply, price rises to settle down in another equilibrium. Expectation about the future plays a significant role in demand. Despite a sound basics, expectations may introduce lots of uncertainties in the price dynamics.

The important point is the mechanism of expectation formation is highly contextual, reflective of many things in the society including governance. I think in the recent rise in petrol prices in the grey markets of Manipur and disappearance of petrol in petrol pumps, expectations play a very important role.

Normally, as soon as a blockade is announced. 'STOCK NIL', signs appear in most of the petrol pumps in Imphal. Overnight a grey market of petrol appears in front of most of the pumps. Women vendors of all ages appear with plastic bottles of all sizes. Long queues are formed in front of every petrol pump. Despite the assurances of the authority this scene is enacted repeatedly. Expectations thus formed enter into the decision making process at various levels. When these expectations fail to materialise there are many destabilising forces in the society.

How are expectations formed? One hypothesis is that expectations are adaptive. Adaptive expectation of price of petrol is based on past behaviour. We have seen petrol prices crossing Rs. 200/-. Going by this hypothesis we expect price to rise further. Currently petrol is available in the grey market in my locality at Rs. 110/- per litre. I cannot afford to stand in the queue. I have an office to attend. In many ways this is cheap.

The alternative is to have someone who would willingly spend hours in the queue for me. This is possible through long term investment in some relationship. I always remember that nothing is free. One day or the other you have to pay the price for everything. The gap between the current grey market price and the peak is an indicator for possibility of a further rise. As most of us have no previous stock of petrol in our homes any further rise in price has to be borne. One way of minimizing this burden is to buy now and keep some stock.

Another hypothesis is rational expectations. It implies that people do not make systematicmistakes in forming their expectations. People base their expectations on all the information economically available about the future behaviour of that variable. The image of our institutions on the basis of available information is not very encouraging.

The independence and accountability of our institutions have been compromised at every level. This is part of the national problem. The highest court of the land recently had to reprimand the union government. That explains why the assurance of the Minister did not have any impact on the grey market of petrol. It is also a sad commentary on governance. Some policy announcements may be received well in the beginning. But if such announcements are repeatedly made, they are as good as 'never made'.

Higher levels of income and development of the credit market have brought more and more vehicles on the road. Earlier expectations of a few vehicle owners had little impact on the petrol market. Now the expectations of the numerous consumers of petrol can have profound influence on the market for petrol.

I donnot know the optimum size of stock of petrol that one has to maintain to neutralise the impact of any bandh or blockade. By optimum size I mean the level of stock that is neither too excessive nor too short. There were times when my stock was about 40 litres. But as time passes uneventfully I become less cautious and decide to use up the stock . This is exactly what happened this time. Surprisingly the price of petrol in the grey market jumped to Rs 100 on the first day itself.

The gradual rise in price has been replaced by a quantum jump. Sub hundred level disappeared and beyond Rs100 the price was sticky. The market for petrol in Imphal has become unstable dominated by speculators. We have petrol from IOC and Myanmar. The smuggling of petrol from Myanmar into our market is well known. My vendor explained that Indian petrol was better becauseMyanmarese petrol would evaporate more. Thus one can hypothesise that the scarcity of petrol in Imphal is artificial.

Sometimes I wonder whether the bandhs and blockades are stage managed by some vested interest. I have been studying the bandhs and blockades in Manipur over a long time. This hypothesis is yet to be validated but cannot be ignored altogether also. Highly provocative events can be stage managed to produce the desired outcome.

The social tension in Manipur is high and very disruptive outcomes could be thwarted by good sense of the people. When the many communities in Manipur have managed to prevent many inter community clash, there seems to be an unanimity in blocking the roads. Bandhs and blockades have become the standard response to any civil society crisis.

We donot bother to document the outcome. Have the organisers of bandhs got their objectives ? The government also has learntto deal with such events. However the government's credibility is yet to be restored. There are many areas where the government has to show some performance to be credible. When many assurances given by it never materialise , how can the expectation for further rise in price of petrol can be managed ?

The scarcity of petrol is a regular event in Imphal. Holistically speaking there is a redistribution . one can even point to the extra income accruing to women vendors. However the high price of petrol and diesel easily lead to higher prices everywhere. Everyone understands the importance of transport cost. More so in an economy where everything is brought from outside.Besides we are all inter connected. When I pay more for something I try to compensate it by setting a higher price for what I am offering.

It is a circle- A is costlier because B is costlier, B is costlier because A is costlier. We need some strong measures to face this crisis . However if we want to neutralise the role of expectations the government should show performance in many areas to convince the people that it means business.